Reverse Innovation

Create Far From Home, Win Everywhere

Vijay Govindarajan, Chris Trimble

• Publisher: Harvard Business Review Press
• Year: 2012
• Print ISBN: 9781422157640
• eBook ISBN: 9781422183984
• Topic: Business
• Subtopic: Management
• Index: Business

A New York Times, Wall Street Journal, USA Today, Amazon Bestseller Reverse Innovation is the new business idea everyone is talking about. Why? Because it presents the blueprint for scaling growth in emerging markets, and importing low-cost and high impact innovations to mature ones.Innovation is no longer the exclusive domain of the Silicon Valley elite. Reverse Innovation will open your eyes to the fact that the dynamics of global innovation are changing—and if you want your firm to survive, you’d better pay attention. The gap between rich nations and emerging economies is closing. No longer will innovations travel the globe in only one direction, from developed to developing nations. They will also flow in reverse. CEOs of the world’s most influential companies agree and have cited Reverse Innovation as their playbook for the next generation of global growth. Authors Vijay Govindarajan and Chris Trimble of the Tuck School of Business at Dartmouth explain where, when, and why reverse innovation is on the rise and why the implications are so profound. Learn how to make innovation in emerging markets happen and how such innovations can unlock even greater opportunity throughout the world. You’ll follow some of the world’s leading companies (including GE, Deere & Company, P&G, and PepsiCo) through stories that illustrate exactly what works and what doesn’t.If you’re in a Western economy, you need to accept that the future lies far from home. But the idea is not just for Western audiences. If innovation is at the heart of your company or your career, no matter where you practice business, Reverse Innovation is a phenomenon you need to understand. This book will help you do that.

PART 1

The Reverse Innovation Challenge

CHAPTER ONE

The Future Is Far from Home

Innovating for emerging markets, rather than simply exporting, can unlock a world of opportunities for multinationals.

GATORADE. It is as American as baseball and apple pie.

Its 1960s roots can be traced to the sun-scorched University of Florida and its football team—the Gators. Oppressive heat and humidity led the team’s trainers to seek better ways than water alone to quickly rehydrate players. They turned to the school’s research labs, which came back with a concoction of water, glucose, sodium, potassium, and flavorings. The tasty cocktail sped the replenishment of the electrolytes and carbohydrates that players lost through sweat and exertion.

Even before it became an actual brand, Gatorade got a nice marketing boost from the coach of Georgia Tech. Asked how his team had lost to Florida in the 1967 Orange Bowl, he lamented, “We didn’t have Gatorade.”

It is a great story, and it is wonderfully fitting for an American icon. But there is an interesting missing link, one that leads back to events far from Gainesville, Florida.

Earlier in the 1960s, there were epidemic outbreaks of cholera in Bangladesh and elsewhere in South Asia. The key to keeping cholera patients alive was simple: keep them hydrated.

According to Mehmood Khan, chief scientific officer of PepsiCo (which bought Gatorade in 2001), Western doctors who went to Bangladesh and elsewhere to help stem the epidemic were surprised to discover a centuries-old local treatment for the severe diarrhea caused by cholera. The concoction included ingredients such as coconut water, carrot juice, rice water, carob flour, and dehydrated bananas. At the time, Western medical opinion held that putting carbohydrates in the stomachs of patients suffering from diarrhea would cause cholera bacteria to multiply and the disease to worsen. “Yet for thousands of years, this was the normal treatment used in Ayurvedic medicine,” says Khan. “By giving carbohydrate and sugar in the solution with salt, uptake was quicker, and patients rehydrated faster.”¹

The success of the treatment was covered in the British medical journal Lancet and made its way to a doctor at the University of Florida. The doctor saw a common problem in the need for rapid rehydration. If such a treatment worked well for cholera patients, it would surely work for healthy football players.

The Gatorade story was unusual for its era. It ran counter to the dominant innovation pattern. Innovations typically originated in rich countries and later flowed downhill to the developing world. Gatorade, by contrast, swam against the tide. It was a reverse innovation. Quite simply, a reverse innovation is any innovation that is adopted first in the developing world. Surprisingly often, these innovations defy gravity and flow uphill.

Historically, reverse innovations have been rare. Indeed, the reason most innovations flow downhill, not uphill, is intuitive. Rich customers in rich countries can afford—and indeed they demand—the latest and the greatest. Demand pushes technology forward. In due course, its benefits trickle down across the globe. You can do the innovation math: the United States and Germany have well over three hundred Nobel Prize winners in science and technology. Meanwhile, India and China, with six times the combined population, have fewer than ten. Consequently, people—especially in the West—expect the future to be invented in Silicon Valley or Houston or Munich, but not in Bangladesh.

Thus, it is natural to suppose that developing nations are engaged in a slow and evolutionary process of catching up with the rich world, both economically and technologically. They do not need innovation. They will simply import what they desire from the rich world, just as soon as they can afford it.

Under that set of assumptions, a strategy known as glocalization makes perfect sense. As practiced by multinational businesses, glocalization posits that the work of innovation has already occurred. Firms can tap emerging markets simply by exporting lightly modified versions of global products developed for rich-world customers—mainly lower-end models with fewer features.

But the assumptions are misguided. What works in the rich world won’t automatically achieve wide acceptance in emerging markets, where customer needs are starkly different. As a result, reverse innovation is rapidly gathering steam—and it will only continue to do so.

On the surface, reverse innovation seems to be a counterintuitive phenomenon. It is easy, after all, to understand why a poor man would want a rich man’s product. But why would a rich man ever want a poor man’s product? The answer is that under certain circumstances, it offers new, unexpected, or long-overlooked value. Consider two modern examples.

When the giant big-box retailer Wal-Mart entered emerging markets in Central and South America, it discovered that it couldn’t simply export its existing retail formula. It needed to innovate. Specifically, its big box had to be radically scaled down. The company created a version of the Wal-Mart store similar to the more “cozy” retail outlets common in Mexico, Brazil, and Argentina.

Smaller stores thrive in those places because shoppers typically lack the liquidity to buy in bulk and to maintain a home inventory. Moreover, consumers often ride bicycles, mopeds, or buses—or else walk—to do their shopping. There are limits to what they can carry home. Small Wal-Mart stores matched the needs of the local culture.

By 2011, Wal-Mart was doing something that would have been hard to imagine just a few years earlier. It was bringing the “small-mart” concept back to the United States. For one thing, its big-box market was saturated. Many U.S. consumers were suffering from big-box fatigue. Furthermore, dense urban environments, with constrained space and ultrahigh rents, could more easily—and profitably—support numerous small stores distributed around town instead of one or two that are the size of a full city block. A variant of the same logic applied in very sparsely populated rural areas, where a big box simply couldn’t thrive. Wal-Mart could become a powerful rival to small-box competitors in that it still enjoys vast economies of scale in purchasing and supply-chain management even with a small store footprint. Soon enough, it seems, some Americans will be able to buy their South Asia–inspired Gatorade at a New York City Wal-Mart scaled to the dimensions of a village bodega.

Next, consider U.S. efforts to improve the cost effectiveness of—and access to—health care. Reformers would do well to look to India for new thinking.

Narayana Hrudayalaya (NH) hospital has transformed health care in India by performing open-heart surgery for just $2,000, compared to upward of $20,000 in the United States. Despite the ultra-low price, NH hospital’s net profit margin is slightly higher than the U.S. average. Furthermore, its quality is world class. The mortality rate within thirty days of bypass surgery is 1.4 percent at NH hospital compared to the U.S. average of 1.9 percent.

NH hospital’s success can only partially be explained by India’s lower costs of labor. The real magic is in process innovation. NH took the radical step of adapting a number of well-understood industrial concepts that have been around since Ford’s Model T: standardization, specialization of labor, economies of scale, and assembly line production.

These techniques enable NH hospital to utilize its resources much more fully, slashing the cost per procedure. For example, expensive equipment, purchased from world-renowned multinationals, is used five times more heavily than in the United States. And, surgeons perform two to three times more procedures. Furthermore, because of the hospital’s high volume, an individual doctor can specialize in a specific type of cardiac surgery. This accelerates learning, improves skills, and increases quality.

These ideas may sound simple, but they run counter to the dominant logic of rich-world health systems. Doctors focus on the most challenging patients, trying to push the envelope on medical science and technology. Cost is not the first consideration, but the last. As a result, Western medicine is organized based on the expensive, and debatable, assumption that every patient is unique. Innovations in India show that, in many instances, there is another way. In fact, NH hospital is bringing its innovative business model to the rich world. It is building a large, two-thousand-bed hospital in the Cayman Islands (an hour’s flight from Miami) to treat uninsured Americans at 50 percent below U.S. prices.²

These are just two of many examples that we will highlight in this book. The dynamics of global innovation are changing.

In his January 2011 State of the Union address, President Obama said that the United States must “out-innovate, out-educate, and out-build the rest of the world.” That’s a fine ambition, but it won’t happen if American innovators focus strictly on American problems.

The new reality is that the future is far from home. If rich nations and established multinationals are to continue to thrive, the next generation of leaders and innovators must be just as curious about needs and opportunities in the developing world as they are about those in their own backyard. Whether you are a CEO, financier, strategist, marketer, scientist, engineer, national policymaker, or even a student forming a career aspiration, reverse innovation is a phenomenon you need to understand. Reverse innovation has the potential to redistribute power and wealth to countries and companies that understand it—and to diminish those that do not. Conceivably, it could accelerate the rise of poor countries and the decline of rich ones.³ But it doesn’t have to turn out that way. Indeed, reverse innovation is an opportunity that is open to anyone, anywhere, with the ambition to go after it.

The stakes are high. As we will explain, ignoring reverse innovation can cost many companies, especially today’s world-class multinationals, much more than a missed opportunity abroad. It can open the door for the so-called emerging giants, the rising generation of multinationals headquartered in the developing world, to inflict pain or even severe damage in well-established home markets. There are dozens of such companies now, with names like Tata, Mahindra, Reliance, Lenovo, and Haier. They are here to stay. (See “Invasive Species: Mahindra & Mahindra in the U.S. Heartland.”)

Jeffrey Immelt, chairman and CEO of General Electric, puts it this way: “If we don’t come up with innovations in poor countries and take them global, new competitors from the developing world—like Mindray, Suzlon, and Goldwind—will. That’s a bracing prospect. GE has long had tremendous respect for traditional rivals like Siemens, Philips, and Rolls-Royce. But we know how to compete with them. They will never destroy GE. The emerging giants, on the other hand, very well could.”⁴

Reverse innovation is not optional. It is oxygen.

Why Emerging Markets Need a Clean-Slate Approach

As leaders of multinationals are well aware, the developing economies are large and are growing at fantastic rates. A few simple numbers paint the picture.

The International Monetary Fund (IMF) regularly ranks nations by various economic metrics.⁵ In population, for example, China is number one, and India is number two. A whopping 85 percent of the world’s citizens, 5.8 billion people, live in poor countries.⁶ In measures of total gross domestic product (GDP), China is number two, India number four, and the total GDP of poor countries is roughly $35 trillion, nearly half of world GDP.⁷

Furthermore, projected GDP growth rates for China and India are at least double those of rich countries. Indeed, growth in poor countries has already outpaced growth in rich ones for several years running. The sharp recession triggered by the 2008 financial crisis made the growth gap look more like a chasm, and the uncertainty created by the U.S. and European debt crises in 2011 has widened the chasm even further. Poor countries are likely to account for at least two-thirds of world GDP growth for decades to come.

It is an enormous opportunity, but one that will not be easy for companies with rich-world legacies to capture. Winning in emerging markets requires far more than simple geographic expansion. As a mere starting point, it requires intense curiosity about how the needs of the developing world are different from those at home.

You can get a preliminary sense of these deep differences simply by considering just one more basic statistic: GDP per capita, the annual income of each nation’s average citizens. This ranking looks little like the population or the GDP lists. The United States still ranks high, sixth in the world, first among countries with a population greater than 10 million citizens (a handful of small but very rich countries top the list). But how about China and India? Scroll down . . . Keep going. Keep going. There! According to the IMF in 2010, China is number 94 (between Bosnia-Herzegovina and El Salvador); India is number 128 (between the Cape Verde Islands and Vietnam).

The point is simple. Developing economies are different. They are not just a little bit different; they are night-and-day different. In the rich world, there are a few people who each spend a lot; in the developing world, there are a lot of people who each spend a little. Either way, total spending is vast. China and India are megamarkets with microconsumers.

This implies a starkly different business challenge. One person with ten dollars to spend has a completely different set of wants and needs than ten people each with one dollar to spend. That’s why it’s unrealistic to expect rich-world products and services to have much of an impact in poor countries. Doing more business in high-growth hot spots—aka poor nations—requires much more than ramping up sales, distribution, and production.

It requires innovation. Reverse innovation.

The Purpose of This Book

In this book, we will focus on what you—and we assume that most readers are leaders of, and leaders within, multinational corporations headquartered in the rich world—must do to stay strong and shape the future. Leaders within the upstart challengers, the emerging giants, will also value this book for its inside view into exactly what the established multinationals have to overcome to compete effectively in the developing world. Emerging giants can use the book’s ideas to drive reverse innovation strategies of their own in their global expansion.

The purposes of this book are twofold: first, to help you grasp the theory and precepts underlying reverse innovation, including the significant strategic value achievable through its application, and, second, to provide yo...

Table of contents

• Cover
• Copyright
• Dedication
• Foreword
• Preface
• Part 1: The Reverse Innovation Challenge
• Part 2: Reverse Innovation in Action
• Conclusion: A Call to Action
• Appendix A: Reverse Innovation Toolkit
• Appendix B: A Research Agenda
• Notes
• About the Authors